SUPERIOR COURT OF JUSTICE - ONTARIO
COURT FILE NO.: CV-13-9969-00CL
DATE: 20130130
RE: DANIEL S. MARKS, Applicant
A N D:
INTRINSYC SOFTWARE INTERNATIONAL, INC., Respondent
BEFORE: MESBUR J.
COUNSEL:
Elder C. Marques and Helen F. Burnett, for the Applicant
Orestes Pasparakis and Vasuda Sinha, for the Respondent
HEARD: January 25, 2013
E N D O R S E M E N T
Introduction:
[1] The applicant, Mr. Marks, is a shareholder of the respondent, Intrinsyc, a company incorporated under the Canada Business Corporations Act.[^1] On December 10 of last year Mr. Marks delivered a requisition to Intrinsyc’s board of directors, requesting the Board call a special meeting of shareholders to consider his motion to remove the board and replace it with another.
[2] Under s. 143(1) of the CBCA any shareholder or shareholders holding at least 5% of the voting shares of a corporation “may requisition the directors to call a meeting of shareholders for the purposes stated in the requisition.”
[3] When it receives a requisition, (subject to certain exceptions which do not apply here) the board is required to call a meeting within twenty-one days after receiving the requisition. The scheduled meeting need not actually occur within the 21-day period. What is necessary is that within the 21-day period the Board choose a date and call the meeting for that date.
[4] On December 20, 2012 the board issued a press release calling the special meeting of shareholders on May 14, 2013 in conjunction with the corporation’s annual general meeting, which would be held about five weeks earlier than usual. The special meeting of shareholders would therefore be held 155 days after the board received Mr. Marks’ requisition.
[5] Mr. Marks is unhappy with what he views as unwarranted and inordinate delay in scheduling the special meeting. He moves to have the court require the special meeting to be held sooner. He relies on section 144(1) of the CBCA which permits the court to order a meeting of a corporation if “the court thinks that the meeting should be called, held and conducted within the time or in the manner it directs for any other reason.[^2] He suggests a date of February 28, 2013 for the special meeting.
The law:
[6] The parties do not disagree on the general legal principles that govern an application such as this, although each emphasizes different aspects of the legal framework.
[7] In a nutshell, the governing principles can be summarized as follows[^3]:
a) The right given shareholders under s. 143 of the CBCA to require the board to call a special meeting is a shareholder’s fundamental right;
b) There is no specific time by which the board must fix the meeting;
c) The board has a responsibility to call the meeting within a reasonable time;
d) The board must decide, using proper business judgment, what is reasonable;
e) The court will not interfere with the board’s decision unless the board acted for an improper purpose, or unreasonably;
f) Scheduling a requisitioned meeting is left to the business judgment of the directors to be determined by them acting honestly, in good faith and with a view to the best interests of the corporation;
g) Corporations are not run “by plebiscite” and shareholders do not have the right to call shareholder meetings as and when they feel like it. The requisition provisions of section 143 and the jurisdiction given to the Court under section 144 are exceptions to the primary role of directors in this regard. The court’s discretion under s. 144 should therefore be exercised sparingly.
[8] It is important to keep these principles in mind in considering the board’s actions in responding to Mr. Marks’ requisition.
The facts:
[9] Mr. Marks is the president of an investment management firm. He and his firm’s clients hold about 6.4 % of Intrinsyc’s shares. Mr. Marks has become dissatisfied with the direction in which the board is taking Intrinsyc. He is worried the company is not focusing on its core business, and instead has been concentrating on pursuing strategic alternatives. He would like the company to focus instead on a potential opportunity with a company called Qualcomm. He is of the view the board is not pursuing the best options for Intrinsyc. He also disagrees with the board’s strategic review process for Intrinsyc, which he views as flawed. He decided that the best way to protect Intrinsyc and its shareholders was to replace the current directors as soon as possible. On December 10, 2012 Mr. Marks delivered his requisition.
[10] Mr. Marks had not discussed his dissatisfaction with the board with any of the board members. He was under no obligation to do so. Instead, on December 20, 2012 Mr. Marks delivered his requisition for a special meeting of shareholders. The stated purpose of the meeting was to replace the entire board. The requisition arrived just three weeks before Intrinsyc’s year end.
[11] The board immediately met on December 11, 2012 to address Mr. Marks’ requisition. The board struck a special committee of two board members to advise the board. The special committee did two things almost at once. First, it retained counsel to advise it on the board’s responsibilities in order to inform its recommendations to the board. Second, on December 12 it contacted Mr. Marks to arrange a meeting with him. On December 13 the special committee participated in a conference call with Mr. Marks and asked him to provide biographies for his proposed board members, as well as an outline of his vision for the future of the company. Mr. Marks provided the biographies, but told the committee he would not provide the additional requested information until his board was in place.
[12] The special committee then met on December 18. After taking advice from counsel it determined that it would make sense to hold the special meeting of shareholders in conjunction with the company’s annual general meeting. Having regard to when the company's year-end financial statements could be completed, the earliest date on which the AGM could be held was May 14, 2013. Accordingly, the special committee recommended to the Board that the special meeting be held on May 14.
[13] In coming to this recommendation the committee considered:
a) Five examples of how other corporations, namely Canadian Pacific Railway Limited, Maple Leaf Foods, Algoma Steel Inc. Unique Broadband Systems, Inc. and HSE Integrated Ltd. responded to requisitions for meetings;[^4]
b) The cost of holding two shareholder meetings within a matter of months;
c) Demands on management;
d) Allowing time for the board to engage with shareholders; and
e) Allowing the release of the company's next audited financial statements before the shareholders’ meetings.
[14] The committee made this recommendation to the board. After discussing the recommendation and the committee’s reasons, the board accepted the recommendation at a board meeting on December 20, 2012. The same day the board announced the date of the special meeting as May 14, 2013, some 155 days after Mr. Marks delivered his requisition.
[15] Thus, less than two weeks after receiving the requisition, and well within the 21-day time frame imposed by the CBCA, the board issued a press release advising of the requisition, and fixing a date for the special meeting on May 14, 2013, to be held in conjunction with the corporation’s annual general meeting. While the AGM is historically held in late June, the board decided to move the AGM earlier so it could be held in conjunction with the special meeting.
The parties’ positions:
[16] Mr. Marks objects to the timing of the special meeting, saying that the board has an obligation to act expeditiously when in receipt of a requisition for a special meeting. He suggests a delay of 155 days is well outside the range of reasonableness and is longer than in any other case. He takes the position the board framed its decision with a view to delaying the special meeting as long as possible. He suggests that in coming to their recommendations and decisions the special committee and board only considered cases where a special meeting was held off for a long period of time. He says all the cases the board looked at involved special circumstances and are not comparable to the situation here.
[17] In contrast, Mr. Marks points to numerous cases where a board scheduled a special meeting roughly two months after receiving a requisition for a special meeting.[^5] Mr. Marks therefore infers the choice of a meeting date here was not reasonable, and does not reflect the business judgment of directors acting reasonably. He says the board’s decision is not worthy of deference. He says the timing of the special meeting deprives him of the right to have a vote expeditiously, and should be replaced by the court’s ordering an earlier date.
[18] The board takes the position it acted reasonably, having regard to the corporation’s best interests. It therefore says the court should defer to its business judgment and decline to exercise its discretion under s. 144.
Discussion:
[19] Both parties have provided significant case law, setting out cases where the court has deferred to a board’s business judgment in setting a meeting date, and cases where it has not. Mr. Marks points out there are no cases in which a special meeting has been delayed as long as 155 days, which is the situation proposed here. He points in particular to the comments of Cumming J in Paulson & Co. v. Algoma Steel Inc.[^6] a leading case on this issue, in which Justice Cumming says:
The directors have scheduled the requested meeting for March 22, 2006. This is some 140 days after the date of the requisition, that is, almost five months later. At first impression, this length of time before the meeting is to be held seems excessive and unreasonable.[^7]
[20] Although Cumming J. described the length of time as seeming excessive and unreasonable, he nevertheless declined to order the meeting to take place earlier. He found that this was not a case where there was any perceived wrongdoing on the part of the current board. He decided that in considering the particular circumstances of the case the board’s decision in scheduling the meeting when it did was a “good faith business judgment falling within the range of reasonableness.”[^8]
[21] Mr. Marks frames the question for the court as:
Was the directors’ decision to delay the special meeting for 155 days, or more than five months, following the delivery of the requisition unreasonable?[^9]
[22] Framing the question in this fashion presupposes the board was driven by a deliberate decision to delay the meeting, as opposed to the board’s taking a decision on when the meeting should reasonably occur. Mr. Marks suggests the board deliberately chose to delay the meeting as long as possible. He suggests this decision was not a proper exercise of the board’s business judgment, and should be accorded no deference.
[23] To the contrary, the board suggests it acted in accordance with the best interests of the corporation as a whole, in a proper exercise of its business judgment. It says the court should decline to interfere with that exercise of business judgment.
[24] Courts have long held that the business judgment of boards of directors is entitled to deference. The business judgment rule was perhaps best expressed in Peoples Department Stores Inc. (Trustee of ) v. Wise:
Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made.
[25] Thus the Court’s role is to determine whether the board applied the appropriate degree of prudence and diligence in coming to its decision on the timing of the special meeting.
[26] In my view, it is not so much the length of the delay, or the timing of the meeting, but the reasons for it that must inform my analysis of whether the board is acting appropriately. There is no question the shareholders who have delivered the requisition have the fundamental right to have their requisition dealt with expeditiously. The board must act reasonably in all the circumstances, or as the court put it in Peoples, with an appropriate degree of prudence and diligence. This involves a good hard look at the board’s actions in the context of this particular corporation.
[27] Intrinsyc is a publicly traded software and engineering services company. Its focus is on bringing next-generation intelligent connected devices to market. Intrinsyc is listed on the Toronto Stock Exchange. Its counsel describes it as a “micro cap” company. Since 2008 its market capitalization has fallen from about $150 million to about $13 million. Until 2008 it enjoyed some significant financial success. Since then, however, it has suffered from the effects of the worldwide financial crisis, coupled with changes in technology and problems with its customers. Its share value has declined 92% since February of 2008.
[28] Since 2008 the company has been trying to rebuild. It has established a special committee to explore various options. Pending finalizing any options, the board has taken the position it is in the company’s interests to conserve cash and reduce costs. To this end it has reduced staff, and clearly communicated to shareholders its ongoing plan of cash conservation. Even though revenues have declined significantly, the company's cash position has remained fairly constant.
[29] For example, at the year ended December 31, 2011, the company showed current assets of about $13.5 million, made up in part of cash and cash equivalents of $9.3 million and short term investments of $2.7 million. For the nine months ended September 30, 2012 the interim financial statements show current assets of $13.7 million, made up in part by about $7.6 million in cash and cash equivalents, short term investments of just under $4.5 million and some additional assets. Current assets have remained at this level even though gross revenues fell from $10.2 million for the year ended December 31, 2011 to $5.976 million for the nine months ended September 30, 2012. For true comparison purposes, the revenues for the nine months ended September 2011 had been just over $7.7 million.
[30] When the board came to its decision to hold the special meeting at the same time as the AGM it did so because it was particularly concerned about the cost of having two meetings within a short period of time, as well as the type of voter fatigue that might result from having two meetings. Voter turnout has historically been very low, and the board was concerned about the effect of two meetings on voter turnout.
[31] The board estimated the cost of two meetings might run as high as $500,000 particularly if the company were required to pay Mr. Marks’ costs for the meeting as well. While the board has not produced a cost estimate for a shareholder meeting, this figure is borne out in Steel J’s decision in Oppenheimer & Co. v. United Grain Growers Ltd. [^10] in which she commented that having only one meeting would save the company in that case about $250,000. That case was decided over fifteen years ago. Costs have hardly gone down since then. I view half a million dollars as a significant expense for a company like this one, with declining revenues.
[32] The board also looked at the fact that management is stretched, and requiring two meetings within a fairly short time frame would put undue pressure on management. The company has reduced its staff as part of its cost cutting initiatives. The board quite properly looked at balancing staffing needs for the ongoing business of the corporation and the staffing needs to schedule shareholders’ meetings in coming to its decision about when it could realistically schedule the necessary special meeting.
[33] Mr. Marks focuses on the length of time before his statutory right can be addressed. He says that to delay the special meeting until the AGM will render the special meeting moot, since the board members’ terms expire at the AGM in any event.
[34] Mr. Marks suggests that the special committee and the board only looked at cases where the special meeting was delayed for a long period of time to support its decision to delay it until the AGM. While Mr. Marks might feel that was what drove the Board’s decision, the evidence does not bear it out.
[35] Mr. Bitove, a member of both the special committee and the board, was cross examined at length on his affidavit in response to this application. Among other things he said:
• The board has an obligation to the process;
• Shareholders have a right to remove directors;
• The committee did not approach the issue of the special meeting in terms of the date on which the meeting could take place. Instead, they had to take into account a numbers of factors and then determine what the meeting date was. The committee looked at it in the best interests of shareholders based on the commitments that would have to be fulfilled in order to have the meeting;
• They felt it was in the best interests of the shareholders and the company to have one meeting as opposed to two, and also to have the financial statements completed;
• The hardest single factor was the fact that we wanted to ensure that we were acting in the best interests of the shareholders and to have two meetings in a six-week period did not seem beneficial to the shareholders or the company;
• The committee discussed the requisition that got dropped in December period, late Q4 and then how that would be affected by year end results and annual general meetings, etc.;
• The board consulted with a major shareholder who commented that having two meetings might not be good for shareholder participation
[36] All these comments suggest to me that the special committee considered a whole range of issues in coming to its decision. I recognize that the delay is lengthy. I understand Mr. Marks’ frustration. I note, however, that he did not ask any board member why the May date was chosen. He admits he has no idea whether the board had a valid business reason for its decision on the date of the meeting. I am satisfied the board did have valid business reasons for its decision.
[37] I also note that Mr. Marks has pointed to no specific prejudice he would suffer with a delay in the meeting. Mr. Marks’ counsel suggests that considering prejudice to the shareholder is an irrelevant consideration. I disagree. Turning to Oppenheimer again, the court determined first that the CBCA does not prohibit the directors from postponing a special meeting “Unless it can be shown that the postponement was for an improper purpose. No improper purpose was proven nor was it shown that prejudice would result to the applicant …”[^11] From this I infer that prejudice to the applicant is something the court should consider in deciding whether the board has acted properly.
[38] I am satisfied the board’s reasons in deciding to defer the special meeting until the AGM are reasonable. The decision avoids redundant costs, particularly in light of the company’s limited resources. The decision addresses the issue of shareholder fatigue, and is a way to limit it. Mr. Marks will suffer no prejudice if the meeting is delayed.
[39] Most importantly, I conclude the board acted honestly, in good faith and with a view to the best interests of the corporation. Its decision falls “within a range of reasonableness”. I therefore defer to the board’s business judgment in its choice of a special meeting date.
[40] In any case, Mr. Marks’ suggestion of a February 28 meeting date is simply impossible. In his cross-examination, Mr. Marks testified that he thought the board would need a lead up of about 60 days in order to schedule a meeting properly. In his affidavit sworn in support of this application he deposes “it is my understanding that, under applicable corporate and securities laws, Intrinsyc could have duly convened a special meeting of its shareholders within less than 60 days of receiving the Shareholder Requisition.”[^12] The company says 60 days is realistically necessary in order to meet all its statutory filing obligations to convene the meeting. At least 45 days are needed, without considering the time for drafting and printing materials. In my view, about 60 days is a realistic minimum. This is borne out by the cases Mr. Marks refers to at paragraph 21 of his factum. In the seven cases he cites, meeting were called from two months and six days to two months and 25 days after receiving the requisition.
[41] At best, therefore, even with a forty-five day minimum the earliest the board could have called the special meeting would have been for mid to perhaps late February of 2013. I say late February because of the general delays caused by the holiday season in December. The company financial statements will be completed such that the AGM can be held in mid May, some 2½ to 3 months later. Given the current timing of this motion, the end of March is now the earliest date a special meeting could realistically be scheduled. This would mean two meetings within about six weeks of one another. On either scenario, two meetings would have to be held in close proximity to one another, at considerable expense to a corporation whose primary goal has been to conserve resources, and whose revenues have been in steady decline.
[42] The board acted quickly and expeditiously. It took advice from its special committee, which in turn sought legal advice and acted on it. The special committee’s primary concern was to act in the best interests of the shareholders. I conclude the board’s decision was reasonable in the interests of all shareholders and the corporation. They acted with appropriate prudence and diligence. I cannot conclude the board acted with any improper purpose, or in breach of any duty, fiduciary or otherwise.
Conclusion:
[43] For these reasons, the application is dismissed. The parties agreed the losing party on the application would be required to pay $25,000 in costs, all inclusive. Mr. Marks will therefore pay Intrinsyc its costs of the application, fixed at $25,000 all inclusive.
MESBUR J.
Released: 20130130
[^1]: R.S.C. 1985, c. C- 44 (CBCA)
[^2]: CBCA s. 144(1)(c)
[^3]: See, for example, Paulson & Co. v. Algoma Steel Inc., 2006 116 (ON SC); Airline Industry Revitalization Co. v. Air Canada, 1999 15075 (ON SC); Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68.
[^4]: The special committee considered requisitions for special meetings to Canadian Pacific’s Board, Maple Leaf’s board, the UBS board, the HSE board, and this court’s decision in Paulson& Co. v. Algoma Steel Inc. referred to at note 3, above
[^5]: See the cases listed at paragraph 21 of Mr. Marks’ factum
[^6]: supra
[^7]: Ibid at paragraph 39
[^8]: Ibid at paragraph 54
[^9]: Applicant’s factum at paragraph 28
[^10]: 1997 22815 (MB QB)
[^11]: Ibid. at paragraph 4
[^12]: At paragraph 37